Should self-employed be auto-enrolled into pensions?

Self-employed people should be auto-enrolled into pensions when paying tax to help close a massive savings gap, according to MPs.

The Government is also being urged to support finance industry efforts to develop ‘sidecar’ savings products, which would allow people to build up a rainy day fund alongside a pension.

A review of free childcare to help single parents enter the workforce is also being pushed by a cross-party group of MPs, which was set up during the pandemic to work on ideas to improve people’s financial resilience.

No pension: Around a third of self-employed people do not save for old age, research has found

Its first report, ‘Saving, Spending, Surviving’, warns that the self-employed are falling through the cracks when it comes to pension savings.

The group cites data showing fewer than one in four self-employed people have adequate pensions and around a third do not save for retirement at all, drawn from previous research done by forecasting firm Oxford Economics for Hargreaves Lansdown.

Under auto enrolment, employed workers are signed up for a pension unless they actively refuse, which few do.

Employers are required to put a minimum of 3 per cent of earnings between £6,240 and £50,270 into staff pensions. Tax relief from the Government provides another 1 per cent.  Workers must put in at least 4 per cent on their own behalf, and if they opt out all the above is lost.

The MPs also note with approval a trial by state-backed pension provider NEST of ‘sidecar’ saving, which combines a short-term pot with a pension. After the savings fund has hit a certain level all contributions will be diverted into the pension.

‘We found this kind of opt-out saving appealing for getting people to save for a rainy day with as few steps as possible,’ says the report. ‘In effect, it would act as a behavioural tool in helping people save, reducing the vast complexity and noise that they could otherwise face.’

Meanwhile, the Government should do more to ensure single parents are financially stable, and review the 15 and 30-hour marks of free childcare support, according to MPs on the All-Party Parliamentary Group on Financial Resilience.

MPs say if hours were increased this would significantly help single parents to be part of the workforce, providing them with greater flexibility to find work that fits around childcare responsibilities and protecting against the costs of childcare.

‘This report is a long-overdue account of how fragile personal finances can quickly turn into a disintegration in living standards, mental wellbeing, and future prospects, says the co-chair of the group, Tonia Antoniazzi, Labour MP for Gower.

‘When we planned the inquiry last summer, we did not anticipate that a cost-of-living crisis so deep would emerge as we concluded our sessions.

‘However, the pandemic can serve as a test-case for what can be done to help those across society cope with extreme financial pressures, both in terms of income and expenditure.’

Co-chair Shaun Bailey, Conservative MP for West Bromwich West, says: ‘In the past there has been a focus on how to lift people out of difficult financial situations, but little has been done to understand why people end up there.

‘What this report does is uncovers just how close large groups of the population are to experiencing a crisis in their personal finances.

‘It is particularly important in revealing that those who we may commonly define as ‘comfortable’ or ‘middle-class’ can be one negative life event away from struggling to meet essential costs.’

What does the Government say?

‘We recognise people are struggling with rising prices which is why we are protecting the eight million most vulnerable families with at least £1,200 of direct payments, starting with the £326 cost of ‘iving payment currently being distributed with the summer holidays on the horizon,’ says a spokesperson.

‘We have spent more than £4billion in each of the past five years to support families with the cost of childcare. The number of childcare places available is stable and thousands of parents are benefitting from this support.

‘The Government remains committed to developing effective durable retirement solutions for self-employed people. 

‘We are working with partner organisations to build evidence and test different approaches aimed at improving retirement savings for self-employed people, with analysis and evaluation of the current trials due later this year’

What does the finance industry say?

The lack of pension savings amongst the self-employed was a problem many were discussing long before Covid-19, but the crisis has further exposed the risks of under-saving, according to Quilter head of retirement policy Jon Greer.

Jon Greer: The prospect of utilising the annual tax return provides the clearest opportunity to get more self-employed people saving in pensions

‘The APPG rightly calls out the success of auto-enrolment and the obvious practical issue of lack of an employer to act as facilitator for the self-employed.

‘The prospect of utilising the annual tax return provides the clearest opportunity to get more self-employed people saving in pensions.

‘However, it may be presumptuous to assume the inertia which has made auto-enrolment so successful extends to the entire self-employed population.

‘Overlaying the automatic enrolment framework will be unpalatable for some and could breed further disaffection amongst segments of the self-employed who value personal autonomy highly.’

Greer says the ‘sidecar’ model for self-employed pensions, which combines liquid and long-term savings, has merit and some trials have taken place.

He adds that is is sensible to review the 15 and 30-hour marks of free childcare support, but adds: ‘The Government could also provide quick relief by simply raising the High Income Child Benefit threshold to £50,271 – the rate at which someone becomes a higher rate taxpayer.

‘The UK tax system is already complicated and failing to have the HICB charge aligned with income tax bands just makes things even more complex and is taxation by stealth.’

Helen Morrissey, senior pensions and retirement analyst at Hargreaves Lansdown, says: ‘The pandemic and cost-of-living crisis have hammered our finances wiping out people’s savings.

‘Action needs to be taken to help people rebuild their financial resilience so they can face the future without worrying about their budgets being de-railed by an unexpected bill.’

Helen Morrissey: The pandemic and cost-of-living crisis have hammered our finances wiping out people’s savings.

She says the self-employed are well known for being under-pensioned, and far less likely to be on track for a moderate retirement income than those who are employed by a company.

‘Some kind of auto-enrolment equivalent would certainly get more saving into a pension though many may rail against locking up their money until the age of 55. Working for yourself means your income may not be steady and could come in peaks and troughs. This makes regular pension saving difficult for many.’

‘The Lifetime Isa could be a better fit for self-employed basic rate taxpayers. The Government bonus acts in a similar way to basic rate tax relief and if they do need to access their money in a moment of crisis they can do so, albeit with a 25 per cent charge.’

Stephen Lowe, group communications director at Just Group, says: ‘The pandemic not only upturned people’s lives but has exploded the idea that people can be more relaxed about the future because automatic enrolment into pensions and the ‘pension freedom and choice’ policy means we can look forward to a comfortable old age.

‘As the report highlights, financial problems increase the risk people will be unprepared for retirement and currently less than 40 per cent of working aged households are on track to achieve an adequate retirement income.

‘We are pleased to see the APPG calling for measures to address the low levels of financial education and engagement, and in particular its support for a trial of automatically booking Pension Wise appointments to find a way of addressing persistently low usage levels.

‘These free, independent and impartial guidance sessions for pension savers aged 50-plus are a key consumer protection measure against poor pensions decisions and scams.’

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